Merrill Lynch

Bloomberg: Merrill to Sell $8.5 Billion of Stock, Unload CDOs

In yesterday's statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage- related bonds that have caused most of the firm's losses -- for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

``Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizeable sale on an accelerated basis, we have decided to further enhance our capital position,'' Thain, 53, said in the statement.

`Little Disheartening'

Merrill will provide financing for about 75 percent of the purchase price, according to the statement. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion.

In other words: ML gets a USD 1.68 billion cash infusion (hopefully), but otherwise keeps the remaining risk on the USD 5 billion CDO crap without having any upside potential. If it wasn't so obvious anyway (selling Bloomberg stake and on and on), this looks pretty desperate.

WEISSGARNIX has more comments (in German) on the shareholder dilution etc.

WEISSGARNIX

Good analysises, funny comments. I could say unfortunately in German, but actually it is this blog's strength.

WEISSGARNIX
Wirtschaft & Politik aus allerletzter Hand …

Here two example posts, a good look at the recent Credit Suisse quarterly result...

Credit Suisse, Version für Erwachsene

... and here some Barrack-Berlin impressions (hehe:):

Aus Obamas JFK-Karaoke

Housing Crisis

Brett Steenbarger took a first hand look at the housing market around his area. Very well worth the read!

Beneath the Housing Crisis: Variation in Housing Inventory

It was clear from our drive that there is no single housing crisis. Much of Naperville real estate is in slow-down mode: prices are holding reasonably well, but taking longer, on average, to sell. In the formerly hot areas of development, however, the overexpansion is mind-boggling. Not even free cars and large rebates can move the inventory--particularly with the tightening of mortgage loan criteria for would-be buyers.

This is not an intensification of the slowdown in the general market; it is many standard deviations from the mean. I have significant doubts that many of these subdivisions are viable at any price. From the pricing of the regional bank stocks that have loaned to these developers, I don't seem to be alone in this opinion. C'mon: are you going to jump in and buy a home in a half-filled, half-built development, when it's not clear that the builder will ever be able to finish the work? Are you going to buy a condo in a partially filled building and hope that the remainder of the units will sell, so that you won't have to cover the shortfall in maintenance assessments?
...
this is like tech stocks in early 2000. While many sectors back then were overpriced and experienced a significant but normal bear market, a host of internet-related companies were brought to market with no underlying demand or value whatsoever. The bust wasn't over until many of these roundtripped to zero.

The difference, of course, with housing is that, when developments fail, contractors don't get paid; their suppliers aren't paid; bank loans go into default; mortgage-backed securities are threatened; homeowners lose value in their homes; municipalities lose property tax income; and on and on. Just as surviving the 2000-2003 period meant staying out of the formerly hot areas, I suspect that those who get through the current crisis will insulate their funds from the many areas touched by the collapse of developments that are forced to resort to increasingly desperate discounts and come-ons.
...
When I looked at the homes that were selling for $1 million and over, however, there was six years or more of inventory on the market. Is anyone likely to pony up that kind of money for what looks to be a depreciating asset? With tightening loan conditions, where are these buyers going to come from?

Short Selling

Bloomberg: Never Have So Many Short Sellers Made So Much Money

More than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007, data compiled by Spitalfields Advisors, the London-based firm specializing in securities lending, show. Almost all of that is being used to speculate that shares will fall, according to James Angel, a finance professor at Georgetown University who studies short selling. The global economic slowdown, $447 billion in bank losses and an explosion of funds that can profit from stock declines spurred the increase in short selling, helping send 22 of 23 countries in the MSCI World Index into bear markets.
...
Assets at so-called 130/30 and 120/20 funds, or those that are allowed to both hold stocks and short them, may climb to $2 trillion by 2010 from $140 billion in 2007, according to a study last year by Westborough, Massachusetts-based Tabb Group. Spitalfields estimates these funds may borrow an additional $600 billion by 2010.

Via Trader Daily.

Funny & Fried

The basic accounting equation goes like:

Assets = Liabilities + Shareholder's Equity

Now for Fanny and Freddie the news paper have it that Liabilities equals USD 5000 billion. So how much will be the assets worth? 10% less than liabilities would result in a loss of USD 500 billion etc.

The NY Times has a detailed list of foreign countries that hold USD 1200 billion of these liabilities. F&F do not only threaten the US financial system, but directly the international ones as well.

Trouble at Fannie Mae and Freddie Mac Stirs Concern Abroad

Asian institutions and investors hold some $800 billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376 billion and Japan $228 billion as of June 2007, the most recent country-specific Treasury figures.

In Europe, roughly $39 billion in Fannie and Freddie debt is held in Luxembourg and $33 billion more in Belgium, countries that are home to large investment management firms. Investors in Britain hold $28 billion, and Russian buyers hold $75 billion. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt.

So this is also very much about bailing out the US's international creditors.

E.g. Swiss Re has 10 billion in their books. There could be a beautiful chain reaction all over the planet if the US goverment doesn't cover any fallout.

Buffett Buffet

Lessons from Lunch with Warren Buffett

Do the Right Thing Even if it’s Hard
Buffet has become one of the richest men in the world while never sacrificing the highest ethical standards. “People will always try to stop you doing the right thing if it is unconventional,” said Buffet.

Listen to Yourself, Not the Crowd
Buffet learned at an early age from his father that it is important to listen to yourself rather than seek the affirmation of others. Although he was heavily criticized for not investing with the crowd in technology and Internet stocks in the late '90s, he stuck to what he believed and turned out to be right. During the lunch he asked his guests, “Would you rather be considered the best lover in the world and know privately that you're the worst — or would you prefer to know privately that you're the best lover in the world, but be considered the worst?"

The Numbers Don’t Lie
Buffet said that he limits contact with the managers of businesses that he invests in, choosing rather to examine the company’s financial records. By relying on the numbers he is able to focus on neutral information and prevent outside noise from affecting his decisions.

1987

We all heard that 1987 had a decent drop in the shock market.



But look at the Hong Kong Hang Seng Index, a terrible 40% drop in two days.


Wow, index investor be warned.

Here is the detailed view on the HSI for October:

Jimmy Cayne

Hilarious!

How to Think About How a Pot-Smoking, Card-Shark College Dropout Brought Down an 85-Year-Old Firm

-- October 2007: Cayne reassures investors: "Most of our businesses are beginning to rebound." Audible snickers are distinct in the background. Later that month, state-owned Chinese lender Citic pays $1bn for a 6% stake in Bear, giving the firm an approximately $20 billion valuation. You heard me. $20 billion. With a b.


-- December 2007: Bear Stearns posts fourth quarter loss of $854 million on massive mortgage-related writedowns, the first quarterly loss in its 85-year history, prompting Cayne to remark, "Mayhaps those Chinamen aren't so smart after all."

...

Posted by guest, Mar 22, 2008 7:41PM

I worked at Bear Stearns for a couple of years, earlier in the decade. Me and the head of fixed income sales were going to give a presentation to the sales force. But before we went we had to show the new Bear Stearns recruiting video. In it Jimmy said, "I love Bear Stearns...most of my personal wealth is in Bear Stearns....We will never sell Bear Stearns!" It ends and it's silent. Then the boss says, "What the fuck is he talking about...who'se gonna buy all my fucking stock?!" And then everyone went nuts throwing shit at the screen where Jimmy's smiling face was still there. That was 5 years ago. Poor bastards!

Buffett Bets Against Hedge Funds

Buffett bets a million S&P 500 will beat hedge fund

Buffett, as usual, is clear in his argument, which ends: “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralising, and their IQ will not overcome the costs they impose on investors.

“Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.”

...

The details of the bet, which was taken on January 1 this year, were released by Carol Loomis, a friend of Buffett and senior editor at Fortune, in Monday’s issue of the magazine.

It is between Buffett (not Berkshire) and Protégé (the firm, not its funds). Each side has put up roughly $320000. The total funds were used to buy a zero-coupon t reasury bond that will be worth $1m at the bet’s conclusion.

That million will then go to charity. Protégé has put its money on five funds of hedge funds — specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses. Buffett has wagered that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds Protégé picked.

Both sides have agreed to disclose where the wager stands at Berkshire’s annual meeting every spring.

According to Loomis, “Buffett assesses his chances of winning at only 60%, which he grants is less of an edge than he usually likes to have. Protégé figures its own probabilities of winning at a heady 85%.

UBS Capital Increase Without Top Management

Very interesting (but German) article about who of the top management participates in the UBS capital increase and who doesnt (short answer, the CEO and Chairman do - nice case of signalling, and nobody else does):
SonntagsBZ: Die Kapitalerhöhung der UBS ist unbeliebt

BTW, I did not double check this, but I think to remember that if not all shares will be sold for CHF 21, then the consortium banks will take over the remaing shares for a minimum price that is much much lower (something like CHF 12 or 15?)!

via pvi.ch

On Top Of The Situation

The Card Shark : Special Situations
By Johnny Chan

If I'm out of town and get a call informing me that a particularly big net loser is willing to play super-high, I'll usually hop on the next plane to Vegas, ready to play within an hour of landing. If I'm in town, I'll either be in the game or milling around the casino ready to get in the game when that guy is likely to be playing. And I'll almost always stay in the game as long as he's playing, putting most everything else on hold until he leaves town. I do this for a very simple reason: One week can often end up being worth more to me than the subsequent month or two.
...
For those who were on top of the situation, following the events over the weekend and ready to take advantage at market open Monday, there was much profit to be had.

In both poker and trading, doing your homework and consistently staying on top of prevailing conditions will do wonders for your bottom line. Train yourself to be ready and willing to take advantage of those special situations that come around infrequently. They can often be worth many months of regular work.

Chart Pattern Satire

Have a look at this black swan formation.

via WEISSGARNIX/The Big Picture

Banks, Liabilities, Profits

This Bloomberg article explains very well, how banks book paper profits through their own outstanding bonds falling in value.

Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds.
...
The debate over what is known as Statement 159 adds to the number of accounting techniques called into question as the U.S. debt market unravels. Investors have criticized banks for booking some writedowns in an accounting category called ``other comprehensive income'' that bypasses their income statements.
...
Here's how it works, according to Richard Bove, an analyst at New York-based Ladenburg Thalmann & Co. A company decides to designate $100 million of its subordinated bonds as subject to mark-to-market accounting. The price of the bonds drops to 80 cents on the dollar from 100 cents. So the firm books $20 million on the ``presumed savings that you have on your liabilities,'' Bove said.

``In the real world you didn't save a dime,'' he said. ``You still owe the $100 million. It's another one of these accounting rules that basically takes you further and further away from reality.''

The Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision objected to the rule before its passage, saying in a joint 2006 letter to the FASB that it would ``have the contrary effect'' of increasing a bank's net worth at the same time its ``financial condition is deteriorating.'
...
Merrill designated about $166 billion of liabilities, or 17 percent of its total, as fair-value instruments subject to mark- to-market accounting at the end of 2007, according to its annual report. Included in the amount were $76.3 billion of long-term borrowings and $89.7 billion of payables under securities- financing transactions.

Prices for the firm's bonds tumbled over the past year: Its floating-rate notes due in January 2015 are trading at about 87 cents on the dollar, compared with about 100 cents last June.

Merrill has said its gains from the liabilities don't add to true earnings power. In a spreadsheet posted on its Web site, Merrill says that investors who want a ``more meaningful period- to-period comparison'' should exclude the $2.1 billion of revenue recorded in the first quarter.

Merrill spokeswoman Jessica Oppenheim declined to comment. The company owns a passive 20 percent stake in Bloomberg LP, the parent of Bloomberg News.

Lehman to Goldman

Lehman, the fourth-biggest securities firm, has reported $1.9 billion of gains related to a widening of its own bond spreads. Citigroup, the largest U.S. bank by assets, has booked $1.7 billion; Morgan Stanley $1.7 billion; JPMorgan Chase & Co., the third-biggest bank, $1.7 billion; and Goldman Sachs $550 million.
...
So far, most banks' writedowns are ``unrealized,'' meaning they've been unwilling or unable to liquidate distressed assets. If prices reversed, the banks would record mark-to-market profits.

The same is true for the liabilities. Companies can't ``realize'' the mark-to-market gains on their debt unless they buy it back at the discounted price. They're unlikely to do so, because the deterioration in creditworthiness means they'd have to replace the debt with higher-cost borrowings, Willens said.

``No one's going out in the market and actually retiring this debt,'' Willens said. ``It's a shell game.''

David Moser, Merrill's managing director for accounting policy, acknowledged that concern in an April 10, 2006, letter to the FASB.

``It seems counterintuitive that when a company's credit spreads are widening, it would recognize a gain in earnings,'' Moser wrote. ``The amounts are typically not realizable and therefore less relevant.'
...
Worthington estimates that similar tightening of bond spreads at Merrill, Morgan Stanley, Lehman and Goldman Sachs may cause them to reverse $5.96 billion of revenue by the end of the year.
...
``Equity may be overstated as a result of these illusory gains that may never be realized, hindering the analysis of the equity cushion to absorb losses,'' S&P Chief Accountant Neri Bukspan wrote in a letter to the FASB.

If and when the ``illusory'' revenue is reversed as losses, the banks and brokers may have to work harder to convince investors to ignore them, Willens said.